Business Law Module 2
Module II: Contract Act, 1872
• Essentials of valid contract
• Offer and acceptance
• Consideration, Capacity to contract
• Free consent, discharge of contract
• Breach of contract; remedy of breach of contract.
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Law of Contracts
Contract is an agreement enforceable by law. Indian Contract Act
1872.
---Agreement = Offer + Acceptance (agreement is an accepted
proposal)
---Enforceability by law
Features of an agreement:
---Consensus ad idem
---Obligation
---Agreement –a wide term—social agreement not a contract
ALL CONTRACTS ARE AGREEMENTS BUT ALL AGREEMENTS ARE
NOT CONTRACTS.
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Law of Contracts
Essentials of valid contract:
• Offer and Acceptance
• Intention to create legal relationship
• Lawful consideration (something in return)
• Capacity of parties—competency
• Free and genuine consent
• Lawful object (purpose)
• Agreement not declared void (Sec 24 to 30 and56)** Next
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• Certainty and possibility of performance
• Legal formalities ( like documentation, registration where
necessary, witnessing, statutory compliance )
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Law of Contracts
Agreements specifically declared void:
• Agreement by incompetent parties
• Agreements under mutual mistake of fact material to the
agreement (Sec20)
• Agreements with unlawful consideration or object (Sec 23)
• Agreements unlawful in part (Sec 24)
• Agreements without consideration (Sec 25)
• Agreements in restraint of marriage (Sec 26)
• Agreements in restraint of trade (Sec 27)
• Agreements in restraint of legal proceedings (Sec 28)
• Agreements which are uncertain and ambiguous (Sec 29)
• Agreements by way of wager (Sec30)
• Agreements to do impossible acts (Sec 56)
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Law of Contracts
Legality of Object: Opposed to Public policy—
examples
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Agreements of trading with enemy
Agreement to commit a crime
Agreement which interfere with administration of justice
Agreement in restraint of legal proceedings
Trafficking in public offices and titles
Agreements tending to create interest opposed to duty
Agreements in restraint of personal liberty
Agreement in restraint of marriage
Marriage brokerage agreements
Agreements interfering with martial duties
Agreements to defraud creditors
Agreements in restraint of trade
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Law of Contracts
Offer and Acceptance
Offer: Signifying to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of
that other.
• Offeror or Proposer or Promisor Vs Offeree, or proposee
• When the offer is accepted, he becomes ACCEPTOR or
promisee
• Offer should show a obvious intention to be bound by it
• Offer should be with an intention to obtain an assent of the
other
• Offer must be definite
• Offer must be communicated.
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Law of Contracts
Offer and Acceptance
Legal rules as to Offer:
• Offer must be one which is capable of being accepted and giving
legal relationship
• Terms of offer must be certain and definite and not loose and vague
• An offer is different from a declaration of intention and an
announcement
• An offer is different from an invitation to make an offer
• Offer must be communicated
• A statement of price is not an offer
• Tender is a definite offer ( person calling a tender is sending an
invitation to offer, person submitting tender is making an offer and
once tender is accepted, the authority becomes the acceptor
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Law of Contracts
Offer and Acceptance
Acceptance:
• Giving assent is acceptance
• Acceptance can be express or implied. Particular offer must be
accepted by the person to whom it is made.
• Acceptance must be absolute and unqualified (conform with the
offer)
• It must be communicated
• It must be according to the mode accepted or usual and reasonable
mode
• It must be given within a reasonable time
• It cannot precede an offer
• It must show an intention to fulfil the terms
• It must be given by the parties to whom the offer is made
• It must be given before lapse of time or before the offer is
withdrawn
• It cannot be implied by silence.
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Law of Contracts
CONSIDERATION: (Sec 2(d) ) and Sec 25
• Ex nudo pacto non oritur actio:- nobody would part with
anything unless he gets a proper price
• Past Consideration
• Executed or Present Consideration
• Executory or Future Consideration
• Must move at the behest of the promisor
• May move from the promisee or on the desire of the promisor
or from any other person
• Need not be adequate
• Must be real and not illusory
• Performance of an existing legal duty will not constitute
consideration.
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Law of Contracts
CONSIDERATION: (Sec 2(d) ) and Sec 25
Exceptions to the rule of consideration:
• Love and affection
• Voluntary services
• Time-barred debt
• Gift
• Agency
• Charitable subscriptions
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Law of Contracts
Capacity to Contract
INCOMPETENT TO CONTRACTS:
• Minors (immature mind)
• Persons of unsound mind –Idiot, Lunatic, drunkard
• Persons disqualified by lawConvict
Alien Enemy, Insolvent,
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Law of Contracts
Incompetent to contracts:---MINORS
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Sec 3 of the Indian Majority Act:- 18 years
Court guardianship---21 years
No estoppel
Doctrine of Restitution does not apply to minors
No ratification on attaining the majority
No liability for breach or for tort arising out of contract
Minor can be a promisee
Contract of marriage
Contract of service or apprenticeship
Position of parents or guardian
Surety for a minor
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Law of Contracts
Incompetent to contracts:---MINORS
• Minor as an agent
• Specific performance
• Can be admitted to the benefits of partnership ( liability
limited to his share in the Pp
• Not a debtor under insolvency
• Cannot be a shareholder in a company (except through lawful
guardian)-cannot be liable for payment of call money
• Under NI Act, he may draw, endorse, deliver and negotiate so
as to bind all parties except himself
• He cannot become a Principal or appoint an agent under the
contract of Agency
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Law of Contracts
Incompetent to contracts:-PERSONS OF UNSOUND MIND
• If at the time of making a contract, he is not capable of
forming a rational judgement as to its effect upon his
interests. Mere weakness of mind is not enough.
• Permanent unsoundness of mind
• Temporary unsoundness of mind
• IDIOT: one who is devoid of the ability to think
• LUNATIC: One whose mental power has been damaged
• DRUNKARD: One is under the influence of intoxicating liquors
or drugs equal to that of a lunatic
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Law of Contracts
Incompetent to contracts:-PERSONS DISQUALIFIED BY LAW:
• Alien Enemy—on the grounds of public policy may hamper
the economic interests
• Insolvent—one who is unable to discharge his liabilities.
However, after of discharge he is competent to enter into
contracts
• Any other person expressly disqualified from entering into any
legal act
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Law of Contracts
Free consent,
CONTRACT- Free Consent Sec 14
Consent is said to be free when it is not caused by
• Coercion
• Undue Influence
• Fraud
• Misrepresentation
• Mistake
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Law of Contracts
Discharge of contract:
• By performance: actual or attempted
• By agreement or consent (novation—new agreement in lieu
of the old ones)
• By impossibility and supervening impossiblity (destruction of
the subject matter, non-existence or non-occurrence, death
or incapacity for personal service, change of law or outbreak
of war
• By lapse of time
• By Operation of Law; merger acquisition, insolvency etc
• By breach of contract
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Law of Contracts
Remedies for breach of contract
• Sec 73—compensation for loss or damage caused by breach of contract—
Proximate losses not remote/indirect losses
• Sec 74 –compensation for breach of contract where penalty specified• Sec 75: Party who is rightfully rescinding is entitled for compensation
• Suit for Rescission
• Suit for injunction
• Suit for Specific Performance
• Suit for damages—Ordinary or special. exemplary(vindictive),nominal,
damages for loss of reputation; damages for inconvenience and
discomfort, mitigation of damages; difficulty of assessment; cost of
decree; damages agreed in advance; liquidated damages and penalty:
• Suit for Quantum Meruit ( as much as earned)
• Penalty by Courts
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